Supreme Court Rules on Important Automatic Stay Issue

It’s a common situation: creditor repossesses a car prepetition; debtor files a chapter 13 case and asks for a return of the car. Does the creditor violate the automatic stay by retaining the car?

Yesterday the Supreme Court held that a creditor’s retention of property of the estate after the filing of a bankruptcy petition does not constitute “an act . . . to exercise control over property of the estate” in violation of 11 U.S.C. § 362(a)(3). City of Chicago, Illinois v. Fulton, No. 19-357, 2021 WL 125106 (January 14, 2021).

The Court did not address whether a creditor’s failure to return the car violates other provisions of section 362(a) (such as paragraphs (4) or (6)). And of course the automatic stay still prevents the creditor from taking other action such as selling the car or attempting to collect the debt. The Court held only that mere retention of the car did not violate section 362(a)(3).

The Court also did not “decide how the turnover obligation in § 542 operates.” In a concurring opinion, Justice Sotomayor explains that an action seeking turnover of property of the estate under section 542 is still an option for the debtor, but turnover proceedings can be time-consuming. Some courts require an adversary proceeding.

Whether you represent a debtor or a creditor in a turnover action in a chapter 13 case, make sure you connect the dots between sections 542, 363(b), 363(e), 361, and 1303. In a nutshell, a creditor with possession of property that the trustee can use (sell, or lease) under section 363 must deliver the property to the trustee. In a chapter 13 case, it is the debtor, not the trustee, who has the exclusive right under section 363(b) to use (sell, or lease) property of the estate. If a creditor requests, the court can condition the use of property of the estate as necessary to provide adequate protection of the creditor’s interest.

Read the opinion carefully before relying on it as a sword or a shield.

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